{"id":9964,"date":"2021-11-08T16:08:09","date_gmt":"2021-11-08T16:08:09","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=9964"},"modified":"2022-02-26T13:05:37","modified_gmt":"2022-02-26T13:05:37","slug":"is-a-stronger-dollar-bad-for-the-market","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/is-a-stronger-dollar-bad-for-the-market\/","title":{"rendered":"Is A Stronger Dollar Bad for the Market?"},"content":{"rendered":"\n<p>The U.S. dollar has been strengthening considerably over the\nlast few months, with the WSJ Dollar Index hitting its highest point since\nSeptember 2020. There are a few factors arguably driving the dollar higher \u2013\nthe U.S. economy is strong relative to the rest of the world, and the Federal\nReserve is about to engage in the \u2018tapering\u2019 of monthly bond and mortgage\nsecurity purchases (QE). A strong economy plus tightening financial conditions generally\nequals a stronger dollar.<sup>1<\/sup><\/p>\n\n\n\n<p>Federal Reserve policymakers have also been commenting more\non sticky inflation in the U.S. economy, which has been pushing up the timeline\nfor possible rate increases. Up until recently, the market had been\nanticipating no interest rate hikes until 2023, but now some believe the first\ninterest rate increase could come as soon as next summer. If the U.S. is indeed\nentering a tightening cycle, it could mean constricted supply of U.S. dollars\n(and more dollar strengthening as a result).<\/p>\n\n\n\n<p>__________________________________________________________________________<\/p>\n\n\n\n<p><strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_11_08&amp;content=stock_market_outlook_report\">Are You Taking Steps to Reach Your Long-Term Financial Goals?<\/a><\/strong><\/p>\n\n\n\n<p>Amongst the many lessons that can be learned from the\neconomy\u2019s ups and downs, the most important lesson is to not time the market. There\nhave always been factors that heavily shifted the market in the past, but over\ntime there has also been a positive return. So, instead of focusing on\nshort-term choices, I recommend sticking to the fundamentals and maintaining a\ndiversified portfolio. <\/p>\n\n\n\n<p>To help you do this, I am offering all readers our\njust-released Stock Market Outlook report. This report contains some of our key\nforecasts to consider such as:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>Zacks Rank S&amp;P 500 sector picks<\/em><\/li><li><em>Zacks view on equity markets<\/em><\/li><li><em>What produces 2021 optimism?<\/em><\/li><li><em>Zacks forecasts for the remainder of the year<\/em><\/li><li><em>Zacks Rank industry tables<\/em><\/li><li><em>Sell-side and buy-side consensus<\/em><\/li><li><em>And much more<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!\u00a0<br> <strong><br>IT\u2019S FREE.\u00a0<a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_11_08&amp;content=stock_market_outlook_report\">Download the Just-Released November 2021 Stock Market Outlook<\/a><sup><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_11_08&amp;content=stock_market_outlook_report\">2<\/a><\/sup><\/strong><\/p>\n\n\n\n<p>__________________________________________________________________________<\/p>\n\n\n\n<p>For the U.S. economy, the impact of a strengthening dollar\ndepends on who you are. Companies in the S&amp;P 500 (large-cap) generate\napproximately 40% of their revenue from abroad, so a strengthening dollar is\ngenerally negative \u2013 it weakens the value of international sales. Foreign\ndemand may also fall over time if strengthening is sustained since a stronger\ndollar means less purchasing power for consumers in foreign countries. On the\nother hand, small- and mid-cap U.S. companies are generally less impacted by a\nstronger dollar, since many sales are generated domestically. <\/p>\n\n\n\n<p>What about the impact of a stronger dollar on equity\nmarkets? As ever, history may be our best guide. <\/p>\n\n\n\n<p>The chart below takes a look at the foreign exchange value\nof the U.S. dollar against the cost of goods and services of advanced economies\nlike the Euro Area, Japan, and England. The green arrows on the chart signify\ntimes when the U.S. dollar was strengthening, while the red arrows show periods\nof dollar weakening. As you can see, the U.S. dollar routinely shifts from\nperiods of strengthening to weakening, and back again.<\/p>\n\n\n\n<p><strong>U.S. Dollar\nStrengthening (Green) and Weakening (Red)<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/3_pic1-2-1024x395.png\" alt=\"\" class=\"wp-image-9967\"\/><figcaption> <strong><em>Source: Federal Reserve Bank of St. Louis<sup>3<\/sup><\/em><\/strong> <\/figcaption><\/figure>\n\n\n\n<p>There are several notable periods, but the first to highlight\nis the dollar surge in 2014. Indeed, from July 14 to December 2016, the U.S.\ndollar strengthened by 21% \u2013 a significant jump. Similar to the current\nenvironment, the dollar was strengthening in 2014 because the Fed was unwinding\nits post-Great-Recession QE program, which eventually gave way to interest rate\nincreases beginning in December 2015. Here\u2019s what the S&amp;P 500 did over the\nsame period:<\/p>\n\n\n\n<p><strong>The S&amp;P 500 from\nJuly 2014 to December 2016<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/pic2-2-1024x395.png\" alt=\"\" class=\"wp-image-9968\"\/><figcaption> <strong><em>Source: Federal Reserve Bank of St. Louis<sup>4<\/sup><\/em><\/strong> <\/figcaption><\/figure>\n\n\n\n<p>As you can see, the S&amp;P 500 endured a choppy period and\nmoved only slightly higher, but there was another key factor in play besides\nFed tightening and a stronger dollar: U.S. corporate earnings (as measured by\nyear-over-year earnings per share growth) were down -11% in 2015. As the Fed\nwas tightening and the dollar was strengthening, it was a weak year for profits\nin what we now know was a mid-cycle pause. <\/p>\n\n\n\n<p>Another period at which to look more closely is the dollar\nweakening in 2017 (red line labeled \u201c2\u201d in the chart). In that year, the U.S.\ndollar slipped 10% against a basket of advanced foreign currencies, which was\nthe biggest decline in over a decade. Yet in 2017, the S&amp;P 500 was up +19%.\n<\/p>\n\n\n\n<p>This quick look at history may lead one to conclude that a\nstronger dollar is bad for stocks and a weaker dollar is good for stocks. But a\nzoomed-out look at history suggests a much weaker correlation between the U.S.\ndollar and U.S. stocks. On the S&amp;P 500 chart below, I\u2019ve labeled the\nperiods of dollar strengthening (green arrows, numbers correspond to chart\nabove) and dollar weakening (red). As you can see, the stock market does not\nhave a firm preference on which way the dollar moves. Stocks have managed to do\nwell under both strengthening and weakening regimes.<\/p>\n\n\n\n<p><strong>The S&amp;P 500 Since\n2012<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image\"><img decoding=\"async\" src=\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/pic3-1-1024x395.png\" alt=\"\" class=\"wp-image-9969\"\/><figcaption> <strong><em>Source: Federal Reserve Bank of St. Louis<sup>5<\/sup><\/em><\/strong> <\/figcaption><\/figure>\n\n\n\n<p><strong>Bottom Line for\nInvestors <\/strong><\/p>\n\n\n\n<p>In 2014 and 2015, the dollar was surging and the stock\nmarket was wobbling, which understandably leads some investors to link the two.\nBut the real factor driving the volatility and sideways move in equity markets\nin those years, in my view, was the decline in corporate EPS registered in\n2015. Weak profits almost always mean weak stock market returns.<\/p>\n\n\n\n<p>As long-time readers of this column know, I believe corporate\nearnings results and shifting expectations around future earnings are the\nbiggest drivers of equity returns. If corporate earnings are expected to surge\nin the next twelve months, and the results end up being better-than-expected,\nthen it doesn\u2019t matter if the dollar is strengthening or weakening. So, if the\ndollar continues to strengthen as the Fed tapers and eventually tightens, it\nwill only matter for equity markets if corporate earnings and expectations are\nfalling at the same time. That\u2019s not what we\u2019re seeing now, but this will be a\nkey factor to watch in 2022.<\/p>\n\n\n\n<p>Also, to stay on track for this upcoming year, we recommend working with a trusted advisor, keeping a diversified portfolio, and staying calm through market volatility. One way to stay calm is to focus on key data points and economic indicators that could positively impact your investments long-term. To help guide you, I am offering all readers our\u00a0<strong><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_11_08&amp;content=stock_market_outlook_report\">Just-Released November 2021 Stock Market Outlook Report.\u00a0<\/a><\/strong><\/p>\n\n\n\n<p>This report looks at several factors that are producing optimism right now and contains some of our key forecasts to consider such as:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><em>Zacks Rank S&amp;P 500 sector picks<\/em><\/li><li><em>Zacks view on equity markets<\/em><\/li><li><em>What produces 2021 optimism?<\/em><\/li><li><em>Zacks forecasts for the remainder of the year<\/em><\/li><li><em>Zacks Rank industry tables<\/em><\/li><li><em>Sell-side and buy-side consensus<\/em><\/li><li><em>And much more<\/em><\/li><\/ul>\n\n\n\n<p>If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!\u00a0<br> <strong><br>IT\u2019S FREE.\u00a0<a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_11_08&amp;content=stock_market_outlook_report\">Download the Just-Released November 2021 Stock Market Outlook<\/a><sup><a href=\"https:\/\/go.steadyinvestor.com\/arrow-stock-market-outlook?source=website&amp;medium=blog&amp;term=motm_blog_2021_11_08&amp;content=stock_market_outlook_report\">6<\/a><\/sup><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>A look at historical trends shows varying impacts of the strengthening dollar, and that other factors may outweigh its effects.<\/p>\n","protected":false},"author":3,"featured_media":8874,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71,1],"tags":[],"class_list":["post-9964","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets","category-private-client-group","category-uncategorized"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9964","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=9964"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9964\/revisions"}],"predecessor-version":[{"id":10268,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9964\/revisions\/10268"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=9964"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=9964"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=9964"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}